Commissioner of Income Tax vs Shah Bhavnani Chandbhai

A.K. Mathur, C.J.—This is an application u/s 26(1) of the Gift-tax Act, 1958 (''the Act'') at the instance of the revenue and following two questions of law have been referred by the Tribunal for answer by this Court : 1. Whether, on the facts and in the circumstances of the case, the Assessing Officer was bound to value the cumulative redeemable preference share of Simplex Castings (P.) Ltd., Bhilai, in accordance with rule 10 of Gift-tax Rules and with section 6(3) of the Gift-tax Act, 1958?

Whether, on the facts and in the circumstances of the case, the Tribunal was justified in directing the Assessing Officer to value the 1,000 cumulative redeemable preference shares of Simplex Castings (P.) Ltd., Bhilai, as per the yield method contrary to the specific provisions of rule 10 and with section 6(3) of the Gift-tax Act, 1958?

During the previous year relevant to the assessment year 1985-86, the assessee gifted 1,000 cumulative redeemable preference shares of Simplex Castings (P.) Ltd., Bhilai. In the return of gift, the assessee has returned the value of these shares on the basis of yield method. While completing the assessment, the Assessing Officer applied the provisions of rule 10 of the Gift-tax Rules, 1958 (''the Rules'') with section 6(3) of the Act, valued these shares as prescribed therein and the value of these shares was estimated on the basis of market price. On appeal by the assessee, the Commissioner (Appeals) confirmed the findings of the Assessing Officer. On further appeal by the assessee, the Tribunal directed that for the purpose of value of these shares, whether equity or preference, the proper method has to be one based on the yield and, accordingly, allowed the assessee''s appeal. Thereafter, the department/revenue moved the Tribunal to refer the aforesaid two questions of law to this Court and the Tribunal has, accordingly, referred the said questions of law to this Court for its answer.

We have heard the learned counsel and perused the record. Section 6 as it stood at the relevant time, reads as under:

Value of gifts, how determined.-(1) The value of any property other than cash transferred by way of gift, shall, subject to the provisions of sub-sections (2) and (3), be estimated to be the price which in the opinion of the Gift-tax Officer it would fetch if sold in the open market on the date on which the gift was made.

(2) Where a person makes a gift which is not revocable for a specified period, the value of the property gifted shall be the capitalised value of the income from the property gifted during the period for which the gift is not revocable.

(3) Where the value of any property cannot be estimated under sub-section (1) because it is not saleable in the open market, the value shall be determined in the prescribed manner.

Section 6 adopted above lays down as to how value of the gift is to be determined, value of any property other than cash transferred by way of gift, shall be estimated to be the price which in the opinion of the GTO it would fetch if sold in the open market on the date on which the gift was made. Sub-section (2) of section 6 says that if a person makes a gift which is not revocable for a specified period, value of the property gifted shall be the capitalised value of the income from the property gifted during the period for which the gift is not revocable. Sub-section (3) of section 6 provides that if the value of any property cannot be estimated under sub-section (1) because it is not saleable in the open market, the value shall be determined in the prescribed manner. The word ''prescribed'' has been defined in section 2(xix) of the Act as under:

Prescribed means prescribed by the Rules made under this Act.

Rules have been made under the Act and they are known as the Gift-tax Rules. Rule 10 which is relevant for our purposes reads as under:

Valuation of property.- (1) The value of a policy of insurance shall be its cash surrender value on the date on which the gift was made.

(2) Where the articles of association of a private company contain restrictive provision as to the alienation of shares, the value of the shares, if not ascertainable by reference to the value of the total assets of the company, shall be estimated to be what they would fetch if on the date of gift they could be sold in the open market on the terms of the purchaser being entitled to be registered as holder subject to the articles, but the fact that a special buyer would for his own special reasons give a higher price than the price in the open market shall be disregarded.

(3) The value of an interest in a firm or association of persons shall be determined in accordance with the following provisions, namely:-

(a) The excess of the market value of the assets of the firm or association over its liabilities (excluding reserves) shall be determined as on the date of gift;

(b) The aforesaid excess shall be allocated among the partners of the firm or members of the association in accordance with the agreement of partnership or association for the distribution of assets in the event of dissolution of the firm or association, or in the absence of any such agreement, in the proportion in which the partners or members are entitled to share profits;

(c) The total of the amount allocated under clause (b) to each partner or member together with the capital contributed by him shall be treated as the value of his interest.

(4) The value of any other property not saleable in the open market shall be determined in accordance with such guidelines or principles as may be laid down by the Board from time to time by general or special order.

Rule 10(2) clearly says that where the articles of association of a private company contain restrictive provision as to the alienation of shares the value of the shares, if not ascertainable by reference to the value of the total assets of the company, shall be estimated to be what they would fetch if on the date of gift they could be sold in the open market on the terms of the purchaser being entitled to be registered as holder subject to the articles, but the fact that a special buyer would for his own special reasons give a higher price than the price in the open market shall be disregarded.

If there is a restrictive provision as to the alienation of shares of a private company, then there are two methods - one is by way of value of the shares ascertainable by reference to the value of the total assets of the company and if it is not possible to ascertain the value, then the second method would be on the basis of the market price which is popularly known as yield method. There are only two methods provided by the rules for assessing the value of the property of the gift. In the present case, the method which has been applied is as provided under the Wealth-tax Act, 1957. The Tribunal has made reference to a case of Smt. Kusumben D. Mahadevia V. N. C. Upadhya and Others Kusumben D. Mahadevia Vs. Commissioner of Wealth-tax, Bombay City-I, This was a case under the Wealth-tax Act and the Tribunal has held that by virtue of decision in the aforesaid case, rule 10 is declaratory and not mandatory. We do not agree with the view taken by the Tribunal for the reason that when rule 10 specifically provides two methods, then it cannot be said that yield method is the only basis of assessment of value of the property.

The learned counsel for the assessee invited our attention to the case of Commissioner of Wealth Tax, Meerut Vs. Sharvan Kumar Swarup and Sons, . This was also a case under the Wealth-tax Act wherein their Lordships observed that the procedural law cannot confer vested right. In this case, rule 1BB of the Wealth-tax Rules came into force with effect from 1-4-1979 prescribing the method for valuing a house wholly or mainly used for residential purposes and in that context their Lordships observed that as rule 1BB has come into force from 1-4-1979, therefore, assessment would be made on the basis of amended rules. In the present case, question before us, as referred by the Tribunal, is as to how to value the cumulative redeemable preference share of Simplex Castings (P.) Ltd. Our answer is that it has to be assessed in terms of rule 10 wherein two methods are provided. In case, the first method is not available, then the second method should be resorted to for assessing the value of the property.

The learned counsel also invited our attention to the fact that the rule has also undergone a change on 1-4-1989. Be that as it may, that is not the scope of enquiry in the present case as the question here is in regard to the determination of value in terms of rule 10 read with section 3 of the Act. Hence, we do not want to observe anything whether the assessee has claimed valuation in terms of rule 10 or not. Accordingly, we answer both the questions in favour of the revenue and against the assessee.